Suppose the inflation rate is expected to be 6.15% next year, 4% the following year, and 2% thereafter. Assume that the real risk-free rate, r*, will remain at 1.55% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. Calculate the interest rate on 1-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 2-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 3-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 4-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 5-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 10-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 20-year Treasury securities. Round your answer to two decimal places. %
Suppose the inflation rate is expected to be 6.15% next year, 4% the following year, and 2% thereafter. Assume that the real risk-free rate, r*, will remain at 1.55% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds.
- Calculate the interest rate on 1-year Treasury securities. Round your answer to two decimal places.
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Calculate the interest rate on 2-year Treasury securities. Round your answer to two decimal places.
%
Calculate the interest rate on 3-year Treasury securities. Round your answer to two decimal places.
%
Calculate the interest rate on 4-year Treasury securities. Round your answer to two decimal places.
%
Calculate the interest rate on 5-year Treasury securities. Round your answer to two decimal places.
%
Calculate the interest rate on 10-year Treasury securities. Round your answer to two decimal places.
%
Calculate the interest rate on 20-year Treasury securities. Round your answer to two decimal places.
%
Select the correct yield curve based on these data.
- The correct sketch is .
- Suppose a AAA-rated company (which is the highest bond rating a firm can have) had bonds with the same maturities as the Treasury bonds. Estimate what you believe a AAA-rated company's yield curve would look like on the same graph with the Treasury bond yield curve. (Hint: Think about the default risk premium on its long-term versus its short-term bonds.)
- What will be the approximate yield curve of a much riskier lower-rated company with a much higher risk of defaulting on its bonds?
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